What is switching cost? Types of switching costs and how to calculate them

The concept of Switching cost is no longer strange to businesses that want to focus on building product strategy. So what is Switching cost ? What methods are there to increase Switching cost? Let's learn more about this topic with 1C Vietnam in the article below.

1. What is switching cost? Illustration

What is switching cost ? Switching cost in Vietnamese means switching cost, specifically the cost that customers must bear when they want to change from one product/supplier/brand to another. other brand. Switching costs are not just money but also include factors such as effort, time, and efforts of customers and businesses.

Example of switching costs: Phone carriers have very high contract cancellation costs to prevent customers from switching to another carrier. However, to attract customers, many carriers are willing to pay this compensation fee to neutralize the above switching costs, thereby attracting and taking over customers from competitors.

2. Types of switching costs

Currently on the market there are two main types of switching costs: low switching costs and high switching costs. In the section below, 1C Vietnam will specifically analyze these two types of costs.

2.1 High conversion costs

Products with high switching costs are often products that are less likely to be substituted. Besides, these products can also bring customers a unique, high-value experience and require consumers to spend a lot of time and effort to own.

An example of the most popular high switching cost product on the market today is the Apple brand iPhone. Not only is it an excellent product in terms of technology and engineering, Apple also creates an ecosystem by regularly launching new products, contributing to improving user experience.

2.2 Low conversion costs

Items with low conversion costs are often fast-moving consumer products and services. The characteristics of these products are that they do not greatly affect customer habits and can be easily replaced by other products.

For example, laundry detergent is a daily consumer product line with low conversion costs. Consumers can change laundry detergent daily, monthly, and each time they make a purchase, they can choose a different product or brand. Therefore, to retain customers, laundry detergent businesses have focused on distribution so that the product always reaches customers when they need it. Besides, focusing on communication and marketing is also an important strategy to engrave the product in customers' minds, becoming the number one priority when customers have a need.

3. The most accurate way to calculate conversion costs

After understanding what Switching cost is , 1C Vietnam will provide businesses with a formula to calculate this type of cost. Specifically:

Conversion costs = Direct labor costs + Manufacturing costs

4. In what areas do conversion costs apply?

Switching cost reflects the cost that customers pay when switching between suppliers. Some areas where Switching cost can be applied include:

• Telecommunications services: When customers want to switch from one network operator to another, they must create a new number, replace the SIM as well as convert data. Providers can use this feature to impose high switching costs, limiting customers from switching carriers.
• Software: When a business decides to convert from one management system to another, they must convert all data, retrain employees, and build appropriate working processes. This process consumes time and effort, so it can be considered a typical example of switching costs.
• Bank: When switching to another bank, users need to reopen the account and change information related to payment to the new account number. This is also an example of switching costs.

5. Some methods to help increase Switching cost effectively

Variable costs are not considered a type of fixed cost. Increasing this type of cost is considered an effective strategy to help retain customers. Businesses can increase the use of some of the following methods to increase Switching costs:

5.1 Brand positioning

A well-positioned business with high brand value does not need to worry about losing market share to competitors. When a brand is "pinned" in the mind and becomes the top priority of customers, it will be easier for them to make purchasing decisions about that brand's products. However, building a good brand requires a lot of time, effort and long-term persistent investment.

5.2 Provide quality products

The most important factor to retain customers is the product. Businesses need to focus on investing in research and development to create the best products before thinking about how to sell them on the market. When a business has a product that is good enough, different and has many benefits for consumers, variable costs will be increased at the lowest cost.

5.3 Effective Marketing Policy

An effective marketing program plays an important role in increasing switching costs. Below are things to note when businesses want to deploy an impressive Marketing campaign:

• Gaining the right customer insight, providing exactly what they need at the exact time.
• Using meaningful messages will help businesses more easily "touch" customers.
• Choose the appropriate form of dissemination for each campaign.
• Choose appropriate communication channels for different target customer groups based on their demographic characteristics.

5.4 Create convenience for customers

Businesses need to make efforts to improve the shopping experience, create convenience for customers through a reasonable distribution system, and bring products closer to customers so they can easily shop when needed. Research how to display products so that they are at eye level, attracting attention and increasing choice. Besides, the product needs to be accessed quickly, as soon as customers need it to increase switching costs.

5.5 Consumer support and after-sales service

After-sales policy is one of the important factors that makes a good impression on customers and keeps them with the business. With the development of online shopping platforms, businesses can fully support customers after purchase through forms such as chatbox, email, phone number,...

Hopefully through the above article, your business has received more useful information as well as answered the question of what Switching cost is . Increasing variable costs is an effective strategy in retaining customers and increasing brand value. To manage Switching costs well, businesses should use 1C:Company Management software - an open solution with a series of useful features for comprehensive business management. In particular, the financial management feature will help businesses track variable costs, automatically calculate and plan to increase this type of cost. To know more about the software, please contact 1C Vietnam for detailed advice!